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New US financial rules to tighen oversight
(Agencies)
Updated: 2009-06-18 09:23 Obama's proposal would require the Fed, which now can independently use emergency powers to bail out failing banks, to first obtain Treasury Department approval before extending credit to institutions in "unusual and exigent circumstances," a change designed to mollify critics who say the Fed should be more accountable in exercising its powers as a lender of last resort. But the proposal also would do away with a restriction imposed on the Fed in 1999 when Congress lifted Depression-era restrictions that allowed banks to get into securities and insurance businesses. The Fed, as the regulator for the larger financial holding companies, had been prohibited from examining or imposing restrictions on those firms' subsidiaries. Obama's proposal specifically lifts that restriction, giving the Fed the ability to duplicate and even overrule other regulators. At the same time, the new consumer agency would take away some of the Fed's authority. Fed defenders argue that none of the major institutional collapses - AIG, Bear Stearns, Lehman Bros., Merrill Lynch or Countrywide - were supervised by the Federal Reserve. Critics argue the Fed failed to crack down on dubious mortgage practices that were at the heart of the crisis. Administration officials concede their plan responds to the current crisis_ in national security terms, it prepares them to fight the last war. But they also insist that a central tenet of their plan is a requirement that from now on financial institutions will have to keep more money in reserve - the best hedge against another meltdown.
That may appear to be a no-brainer: If banks and other large institutions have more money, they won't be vulnerable if their risky bets go bad. However, banking regulators have been arguing for years over implementation of an international standard for bank capital. Treasury Secretary Timothy Geithner said Wednesday hoped to move on enhanced capital standards "in parallel with the rest of the world." Obama would also place hedge funds and derivatives, the complex financial instruments traded privately in a multitrillion-dollar market and blamed for hastening the financial crisis, under government supervision. The proposal would give the SEC oversight of hedge funds and other private pools of capital, including venture capital funds "It really represents a comprehensive and pragmatic approach to reforming our regulatory system," SEC Chairman Mary Schapiro said in a telephone interview. "It really does a lot to address things we're most concerned about." The regulatory overhaul ended up eliminating only one agency, the Office of Thrift Supervision, generally considered a weak link among current banking regulators. The OTS oversaw the American International Group, whose business insuring exotic securities blew up last fall, prompting a $182 billion federal bailout. The failure to merge all four current banking agencies into one super regulator could open the door for big banks to continue to exploit weak links in the current system. Sen. Chuck Schumer of New York, a leading Democratic voice on Wall Street issues, praised the administration's plan but said he would consider further consolidation. "We're removing one major agency-shopping opportunity, but there's a real potential for others," said Patricia McCoy, a law professor at the University of Connecticut who has studied bank failures.
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